## Facts

- FHFA, as conservator for Fannie Mae and Freddie Mac, sued Nomura entities, RBS (as underwriter on some deals), and certain individuals over seven private-label RMBS securitizations purchased by the GSEs between 2005 and 2007.
- The RMBS offering documents represented that underlying loans generally complied with stated underwriting guidelines, that exceptions were limited and justified, and disclosed collateral statistics including loan-to-value (LTV) ratios and owner-occupancy rates.
- FHFA alleged, and the district court found after trial, that many loans materially deviated from the stated underwriting guidelines and that key statistics (including LTVs and owner-occupancy rates) were significantly misstated.
- Evidence included loan-file reviews, re-underwriting analyses, expert testimony, and internal and third-party diligence findings identifying red flags about guideline compliance.
- Nomura’s due diligence reviewed only a non-random subset of loans it viewed as riskier and did not systematically test compliance with underwriting criteria or implement corrective changes after red flags emerged.
- After a bench trial in the Southern District of New York, the district court found defendants liable and awarded rescissory relief of about $806 million (adjusted purchase price plus prejudgment interest) in exchange for tender of the certificates.

## Issues

1. Whether the RMBS offering documents contained materially false or misleading statements about underwriting-guideline compliance and collateral statistics such as LTV and owner-occupancy.
2. Whether defendants established the Securities Act § 12(a)(2) “reasonable care” defense based on their diligence practices and asserted industry custom.
3. Whether defendants carried their burden to prove “negative causation,” i.e., that losses were caused by market-wide factors rather than the alleged misstatements.
4. Whether FHFA had standing and whether the federal and state claims were timely under applicable limitations rules, including HERA’s limitations provision.
5. Whether rescissionary relief (refund of adjusted purchase price for tender of the certificates) was a proper remedy on the record.

## Decision

- The Second Circuit affirmed the district court’s judgment for FHFA in all material respects.
- The court upheld findings that offering documents contained material misstatements about underwriting-guideline compliance, LTV ratios, and owner-occupancy rates.
- The court held defendants did not meet the objective “reasonable care” standard under § 12(a)(2), and industry practice did not define reasonableness where practices were lax.
- The court upheld evidentiary rulings excluding key defense loss-causation testimony and concluded defendants failed to prove negative causation.
- The court rejected standing and timeliness defenses, holding FHFA could sue as conservator and that HERA rendered the claims timely.
- The court affirmed rescissionary relief requiring repayment of the adjusted purchase price (with prejudgment interest) upon tender of the certificates.

## Legal Principles

- Under Securities Act § 12(a)(2), liability may attach for offering or selling securities by means of a prospectus containing material misstatements or omissions, subject to a statutory “reasonable care” defense.
- Materiality in RMBS disclosures may be established by evidence that representations about underwriting practices and quantitative collateral attributes (including LTV and owner-occupancy) were false in ways a reasonable investor would consider important.
- The § 12(a)(2) reasonable-care defense is an objective inquiry; prevailing industry custom does not control where it tolerates inadequate verification or ignores red flags.
- Negative causation under § 12(a)(2) is an affirmative defense on which defendants bear the burden; unreliable expert benchmarking may be excluded, and failure to prove negative causation leaves statutory liability intact.
- As conservator, FHFA may bring purchaser-based RMBS claims on behalf of the GSEs, and HERA supplies an extended limitations period for such actions.
- Rescissionary relief under § 12(a)(2) may be implemented through repayment of the adjusted purchase price (with prejudgment interest) in exchange for tender of the securities.

## Conclusion

The Second Circuit sustained trial findings that RMBS offering documents materially misrepresented underwriting and collateral characteristics and held defendants liable under § 12(a)(2) and related provisions, rejecting reasonable-care and negative-causation defenses and affirming rescissionary recovery for FHFA as conservator.


Fed. Hous. Fin. Agency v. Nomura Holding Am., Inc., 873 F.3d 85 (2d Cir. 2017)